Product Lines and Price Discrimination in Markets with Information Frictions

48 Pages Posted: 15 May 2017 Last revised: 16 Aug 2020

See all articles by Natalia Fabra

Natalia Fabra

Universidad Carlos III de Madrid - Departmento de Economia

Juan Pablo Montero

Pontifical Catholic University of Chile

Date Written: May 2017

Abstract

A well known principle in economics is that firms differentiate their product offerings in order to relax competition. However, in this paper we show that in-formation frictions can invalidate this principle. We build a duopolistic model of second-degree price competition with information frictions in which (i) there always exists an equilibrium with overlapping qualities, whereas (ii) the equilibrium with non-overlapping qualities exists only when both information frictions and the costs of providing high quality are small enough. As a consequence, reasons other than

the attempt to soften competition should be used to explain why firms in some cases carry non-overlapping product lines.

Keywords: pricing strategy, product strategy, retail competition, search, second degree price discrimination, vertical differentiation

Suggested Citation

Fabra, Natalia and Montero, Juan Pablo, Product Lines and Price Discrimination in Markets with Information Frictions (May 2017). CEPR Discussion Paper No. DP12046, Available at SSRN: https://ssrn.com/abstract=2968387

Natalia Fabra (Contact Author)

Universidad Carlos III de Madrid - Departmento de Economia ( email )

E-28903 Getafe (Madrid)
Spain
+34-91 6249594 (Phone)
+34-91 6249329 (Fax)

Juan Pablo Montero

Pontifical Catholic University of Chile ( email )

Av Libertador General Bernardo O'Higgins 340
Santiago, RegiĆ³n Metropolitana 8331150
Chile

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